SuccessFactors' CEO On SAP's SaaS Strategy

After I wrote about SAP's new SaaS strategy Wednesday, several SAP competitors sent emails slamming the strategy. Not an unusual response from competitors, right? But I did accept the offer to talk to Lars Dalgaard, CEO of SuccessFactors, which just landed a massive deal for 420,000 seats of its talent-management SaaS with longtime SAP partner Siemens AG. This conversation, I thought, might be interesting.And it was, on several fronts. Lars kept things lively, never once shifting into a monotonous diatribe about paradigm shifts. (Thank you, Lars.) And besides the occasional snarky competitive jab (SAP sells on-premise talent-management software--which Siemens either didn't consider or chose not to buy for its global workforce--and is planning a SaaS version of talent management), Dalgaard provided some thoughtful commments on why he thinks SAP will struggle with SaaS.

No 1: Wall Street won't tolerate it, Dalgaard argued. "You can't transition from an old model to a new model without getting a massive impact on revenues...earnings and revenue will go to [expletive] and you'll be in the penalty box for years."

Well, what about SuccessFactors, I ask. How could've it had a fairly successful IPO if investors didn't believe in SaaS? "[SAP has] a history and we don't," he answered. "You can't get out of a place you belong to." The problem, Dalgaard said, is investors' unwillingness to rock the boat. "They're not going to say, 'That's so cute and sweet; you want to change your strategy, so your financials will look like crap for [several years]'. Wall Street will say, 'Show me, or I'm gone from your stock'. They'll just sell. Any information of any type outside the normal pattern of recognition, they'll sell. They'll say, 'When you've proven it, then we'll talk again and we'll be happy to go back to your stock.'"

Ouch! I would counter, however, that there have been plenty of instances of tech companies reinventing themselves, sending their stock price back into the stratosphere after a momentary lapse in the commode. (Apple, anyone?)

No 2: SAP doesn't have the technology infrastructure to support SaaS, Dalgaard argued. SuccessFactors' four data centers consist of thousands of servers networked to create one big "supercomputer." This network uses a "round robin" system, where if a request comes in from a customer, it's routed to any server with available capacity in one of three layers--Web, application, or database--depending on the transaction.

So, does SuccessFactors use virtualization, I ask? Well, that's how companies such as VMware have productized that approach, he responded. "We created our own architecture almost 10 years ago, and there was no such thing as server virtualization at that time," Dalgaard said. SuccessFactor's capital expenditures, shown on its quarterly reports, prove what a good job the company does in keeping its data center costs low, he said. "Someone like SAP will have to find out how to do that effectively, and that takes a very long time," Dalgaard said.

So, to the point, Dalgaard argued that SAP hasn't innovated the type of data center infrastructure to support the growth of a SaaS business. However, I remember months ago former SAP CEO Henning Kagermann talking about potential partnerships with data center providers for SaaS, and just last month at Sapphire, co-founder Hasso Plattner was talking about virtualization and SaaS (albeit in that professorial style that leaves his pupils unsure as to whether they're witnessing vocal brainstorming or some new insights into wheels in motion).

No 3. It's not just the technology, stupid. Ah, we love to talk about single tenant vs. multitenant architectures, blah, blah, blah. But what about salespeople commissions? Software salespeople are used to getting their commissions for on-premise license deals, a big chunk of which is paid within the first year. Now with SaaS, the money comes in more like a trickle, spread over potentially several years. Salespeople aren't going to wait three years to get their full commissions, Dalgaard noted.

I see his point, as this is the software industry-most salespeople don't even last three years at one company. "With a big software company, quotas and compensation plans are so rigidly defined. SaaS requires an enormous change in thinking in these areas," Dalgaard said. SaaS pure-plays, he continued, are like startups, whether they were created a year or 10 years ago. There is stock options, evangelism, and the opportunity to become part of something big, rather than being something that's already big and is now trying to keep up with the kids.

So how does SuccessFactors compensate salespeople? Dalgaard won't say. "I don't want to give Bill McDermott any ideas," he said. (Ah, but we don't know if McDermott, a brilliant salesman in his own right, hasn't already worked out a formula, do we?)

But it's not just the salespeople. A shift in how software is designed, supported and sold affects marketing and support-staff training. And what about those longtime partnerships with the companies that implement on-premise software, the Accentures and Deloittes of the world? What about resellers? How will they adapt to this door slamming on deployments of online procurement and HR applications?

Dalgaard's points aren't objective, of course, but they are interesting. SAP, I'm sure, would argue its SaaS strategy doesn't represent a seismic shift in its model, since it'll continue to develop its core Business Suite for onsite deployment, as well as on-premise versions of some of the SaaS applications it plans.

But it's not going to be simple, either. One thing I agree with Dalgaard on 100%: The fun for SAP has just begun.